Balance Dues: Secured Creditors Get A Fresh Lease Of Life!

The Supreme Court in a recent ruling in Deepak Bhandari v Himachal Pradesh State Industrial Development Corporation has decided an important question on the law of limitation while interpreting the State Financial Corporation Act, 1951 ("SFC Act"), which will have wide ranging ramifications on secured creditors seeking to recover its secured debts under other special recovery laws.

The short question which arose before the apex court was whether the period of limitation for filing a suit by a State Financial Corporation (“Corporation”) to recover its balance dues, after sale of the secured assets under Section 29 of the SFC Act, would commence from the date of the recall notice or from the date of the sale of the assets.

A Corporation has wide powers under the SFC Act and can, much like a secured creditor acting under Section 13(4) of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act), under Section 29 of the SFC Act, take over the possession of the secured assets and sell the same to realize its secured debt. However, the amounts realized after sale of the secured assets may be less than the total debts due by the borrower (or guarantors) to the Corporation. The only remedy to recover the balance dues is to institute a civil suit for recovery of the same. While the limitation for recovery of such amounts is ordinarily 3 years under the Limitation Act, 1963, the moot question was from when the period of limitation would commence – would it commence from the date when the main recall notice was issued pursuant to which the Corporation took action under Section 29 of the SFC Act and sold the assets or would the period of limitation be set to trigger from the date of the sale of the assets when the Corporation actually comes to know as to what exactly are the balance dues of the borrower.

The Supreme Court, on final analysis, held that when the Corporation takes steps for recovery of the dues by resorting to the provisions of Section 29 of the SFC Act, the limitation period for recovery of the balance amount would start only after adjusting the proceeds from the sale of assets of the borrower – as the Corporation would be in a position to know as to whether there is a shortfall or there is excess amount realised only after the sale of the secured assets.

Implications under SARFAESI Act

The judgment will have direct implications on the entire banking industry owing to the strong similarities between the powers of the Corporation under the SFC Act with that of the secured creditors under the SARFAESI Act and the Recovery of Debts Due to Banks and Financial Institutions Act, 1993 (DRT Act). A secured creditor under Section 13(4) of the SARFAESI Act can take possession of the secured assets and sell the same towards realization of its secured debts. Under Section 13(10) of the SARFAESI Act, where dues of the secured creditor are not fully satisfied with the sale proceeds of the secured assets, the secured creditor may file an application in the form and manner as may be prescribed to the Debts Recovery Tribunal having jurisdiction or a competent court, as the case may be, for recovery of the balance amount from the borrower. Therefore, if the balance dues are more than Rs.10 lakhs, then the recovery suit will be before the DRT, and if it is less than that, then the recovery suit will be before the civil court. If the suit is before the DRT, then under Section 24 of DRT Act, the provisions of Limitation Act, 1963 would apply to suits. However, there is no precedent, in the context of SARFAESI Act and the DRT Act, as to whether the period of limitation for recovery of the balance amount, as prescribed under Section 13(10) of the SARFAESI Act, would commence from the date of the recall notice or the date of the sale of the secured assets. It is submitted that the principle of computation of the period of limitation, as laid down by the Supreme Court in Deepak Bhandari, would apply to all such cases and which would come as a huge relief to the banking industry. This is because the secured creditors may now wait for the assets to be sold under SARFAESI Act without needing to worry as to when the period of limitation would lapse for filing of the application (i.e. suit) under the DRT Act. The banks would not have to needlessly incur heavy costs towards court fees for filing suits for the entire claim just to save the suit from being time-barred, even when the sale process under SARFAESI proceedings may be at its final stages. The principle laid down in Deepak Bhandari would also help the secured creditors to manage their non-performing assets (NPAs) and recover their dues in a systematic manner, whereby they will not be compelled to take out parallel proceedings against the NPAs, under the SARFAESI Act and the DRT Act, just to save the respective claims from being time-barred. The secured creditors may now proceed in a planned manner to recover their dues under the NPA whereby it first takes action under the SARFAESI Act and tried to recover as much as it can; and only thereafter initiates recovery proceedings under the DRT Act.